How to Create a Winning and Effective Sales Compensation Plan
by Jonathan Whistman
It’s always a memorable milestone in a company’s growth—that moment when you decide that it is time to hire a salesperson. Although this moment carries some excitement, it also carries some anxiety and unknowns. One of the unknowns is how to go about paying a sales person and developing a compensation plan. Let’s cover some of the key details, as your ability to design a plan that moves all the right levers is intrinsic to your success.
Here are the top four things that must be true about your plan:
- Your plan allows you to attract, retain, and even steal superstar salespeople from your competition. It keeps your stars happy.
- It connects to the longer-term strategy of your organization while not penalizing the team.
- It is simple to understand, and each measure is directly tied to something under the salesperson’s control.
- There must be a wide margin between the total comp of start performers and that of average. (although make sure you are just hiring a star when you get started.)
Keep it simple
Compensation plans should always be as simple to understand as possible. If you are paying for performance (and with sales you better be!) then make sure that you are able to accurately and easily track each of the areas that you’ll be paying for. There’s nothing worse that having miscommunication with someone’s paycheck.
Typically, sales plans cover three parts: Base salary, variable commissions and bonuses. Let’s briefly discuss each.
This is the portion of your salesperson’s compensation that is guaranteed. It is sometimes tempting for newer companies to hire a “commission only” salesperson thinking that it limits the risk the company takes in hiring a person. While this may seem true, it rarely works out that way. A great salesperson knows their worth and can always find a role that covers some base salary. What you end up with if you only offer commission, are low-level entry sales people. This isn’t a risk you can take. Commit to hiring only when you can afford to pay a base. You might choose to start with a base and decrease it over time as the salesperson gets established.
This is the portion of compensation that is based on selling or some other revenue generating activity performed by the sales person. This should be tied to things the salesperson directly impacts. For instance, if you have “appointment setters” who pass the appointment on to a field rep, they’d receive commission on setting the appointment, regardless of how the deal ends since they don’t impact the close. The field rep would get paid on the close, but not on the appointment.
Bonuses can be actual compensation or non-cash incentives that drive a specific behavior. For instance, you might pay this on opening new accounts that the company has not previously sold to. You can be creative here. I know of one company that leases a high-end car and the best salesperson each quarter gets to drive it for the next quarter. I can tell you this produces some nice sales competition.
The question remains, how do we decide what to pay? In HR circles you will hear the term TTC, meaning Total Target Compensation. Or in simple terms, how much should they make? This number should be competitive. Make sure you aren’t overpaying. I recommend that you get a compensation study from a company such as ERI. You can find them at erieri.com. You’ll pay a few hundred dollars but it will give you the data you need to attract the best. Once you have a target, you should attempt to pay at the 90th percentile, meaning you’ll pay greater than 90 percent of the companies. This is really important when you are new because you need the best. If you have a sales team of two and one is underperforming that’s 50 percent of your team—you need all-stars.
Next, take the TTC and split it between the three categories: base, variable, and bonus. A rule of thumb is, “The greater the influence the salesperson holds over the closing a sale the larger the commission portion should be.” This means if the TTC was $100,000 and they have a big impact on closing the business you might split that as a $40,000 base and then a mix in variable/bonus. Called a 40/60 mix. You could also choose 50/50, 30/70 or any other combination as long as you remember the rule.
So now you have the outline of a great compensation plan that should attract high-performers. Make sure you are diligent in your interviewing process and that you pick a superstar. Enjoy the benefits that come from successfully adding a salesperson to your team.
Jonathan Whistman is the author of “The Sales Boss: The Real Secret to Hiring Training and Managing a Sales Team.” He is the senior partner at Elevate Human Potential and shares his insights from more than 2,500 sales rides in the field.
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